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Melco Crown's Building Dreams on the Cotai Strip

City of Dreams drives Melco Crown's results past expectations.

Melco Crown(Nasdaq: MPEL) leaned on the City of Dreams Casino to answer the dreams of investors in the third quarter, delivering results that surprised almost everyone.

At the Cotai Strip casino, located across from Las Vegas Sands' (NYSE: LVS) Ventenian Macau, revenue grew 75.2% to $504.0 million, and property EBITDA grew to $114.9 million. This EBITDA margin of 22.8% still lags behind Las Vegas Sands and Wynn Resorts(Nasdaq: WYNN) in Macau, but at least it's trending in the right direction.

Overall, Melco reported revenue of $727.0 million, up 45% from last year, adjusted EBITDA of $136.3 million, and net income of $15.8 million, or $0.03 per American depositary share.

Room rates were a little concerning at Melco Crown, however. Altira's average daily rate declined from $215 to $161, which isn't a huge surprise given gamblers' move toward the Cotai Strip. What was surprising is that City of Dreams' average daily rate fell from $166 to $158, and occupancy reached just 77%. Apparently, people love to gamble at City of Dreams but would rather stay at The Venetian, where room rates are rising and occupancy is up.

Melco Crown's quarter was a step in the right direction, but it looks as if Melco is riding success on the Cotai Strip instead of taking share on its own. That may continue as Las Vegas Sands opens Sites 5&6 next to City of Dreams. Still, I would like to see room rates go up instead of down, especially on the Cotai Strip where Las Vegas Sands is seeing improving room comps.

I think Las Vegas Sands and Wynn Resorts are better operators, but Melco will be able to keep putting up big numbers just by virtue of being in the right location in Macau. As they say in real estate, it's all about location, location, location.

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